1 Contents Introduction....................................................................................................................................................................... 3 Case In Point: Impact of Calculation Choice ................................................................................................ 3 Findings............................................................................................................................................................................... 4 Vote Counting Methodology by Company ...................................................................................................... 4 Consistency of Shareholder/Management Proposal Methodologies .................................................... 6 The Effect of State Law on Vote Calculation Methodologies .................................................................... 6 Delaware .................................................................................................................................................................... 6 Maryland ................................................................................................................................................................... 7 California and Minnesota .................................................................................................................................... 7 Ohio............................................................................................................................................................................. 8 Bermuda .................................................................................................................................................................... 8 Methodology .................................................................................................................................................................... 9 Appendix ......................................................................................................................................................................... 11 2 Introduction This purpose of this project is to evaluate how companies in the S&P 500 and Russell 1000 determine “passage” of both shareholder and management proposals. Specifically, the project reviewed the following: Vote counting methodology by company – whether broker non-votes or abstentions were used in calculations of votes cast in favor. This is meaningful because different methodologies can impact whether a proposal is considered to have passed. Consistency of vote methodology between management proposals and shareholder proposals. Higher passage thresholds can be achieved by including broker non-votes or abstentions in the denominator when calculating certain proposals. Effect of state law on vote calculation methodologies was also considered. Some states impose different requirements to include broker non-votes or abstentions. Companies incorporated in other states that do not require such inclusion, may still have chosen to do so under their own bylaws. Case In Point: Impact of Calculation Choice Below is a case study from Nabors Industries 2013 Annual Meeting, where two proposals received less than majority support based on the company’s methodology. However, the outcome would have been otherwise if broker non-votes were excluded from the calculation: Nabors Calculation: Including Market Standard: Excluding Proposal #7 Broker non-votes Broker non-votes Votes For 138,901,515 138,901,515 Votes Against 117,887,239 117,887,239 Abstentions 499,968 499,968 Broker non-votes 23,133,967 - TOTAL 280,422,689 257,288,722 % For Votes/Total 49.53% 53.99% Nabors Calculation: Including Market Standard: Excluding Proposal #10 Broker non-votes Broker non-votes Votes For 130,962,251 130,962,251 Votes Against 125,618,933 125,618,933 Abstentions 707,538 707,538 Broker non-votes 23,133,967 - TOTAL 280,422,689 257,288,722 % For Votes/Total 46.70% 50.90% 3 Findings Vote Counting Methodology by Company Abstentions An abstained vote, or abstention, is a vote that is not cast either for or against an issue, but is still “cast.” The findings conclude that abstention data for the S&P 500 and Russell 1000 is nearly the same: 52% of companies include abstentions Just under 48% exclude them Less than 1% include them only if they are necessary to constitute a quorum (this represents three companies, two incorporated in Minnesota and one in California). Note: The effect of State Law is discussed in greater detail below. In general, the data on this point suggests there is no clear consensus about what it means for a share to be “cast” or “voted,” and whether abstaining is an act of voting. It also suggests some difference of opinion about whether it is reasonable to calculate votes---as Delaware law permits---out of all shares entitled to vote on a matter, even if they have not actually voted “yes” or “no.” Many companies will use the standard of “majority of shares voted on the proposal,” or “shares entitled to vote on the matter,” but some companies define each of these standards to include abstentions, while others define each to exclude them. Similarly, among companies that use the standard “shares entitled to vote at the meeting,” some define this to include abstentions, and others to exclude them. Broker Non-votes A broker non-vote occurs when shares typically by a broker, and are not given instruction as to how to vote. The brokers do not have discretionary power to vote these shares on “non-routine” matters and thus a broker non-vote results. The data show an overwhelming majority, or 94% of companies in both the S&P 500 and the Russell 1000 exclude broker non-votes from the denominator when calculating the passage of shareholder proposals. Of the firms that do include broker non-votes, some are incorporated in states where the default standard under state law dictates the inclusion of uninstructed shares, either in all cases or only when those shares must be counted to achieve a quorum at the annual meeting. 4 Only 36 firms in the sample (under 4%) always include broker non-votes in the denominator of the calculation. (Except for AIG and Hospitality Properties Trust, all the firms in this group use the same standard for both management and shareholder proposals.) The firms are listed below. 26 companies incorporated in states Nine companies incorporated in Ohio*, where the state law default does not where the state law default includes include broker non-votes broker non-votes 3D Systems Big Lots AIG DDR Corp. American Capital Agency Corp. Forest City Enterprises Cameron International Goodyear Tire Cheniere Energy J.M. Smucker CoreLogic Lincoln Electric Cytec Industries Nordson Corp. Brookdale Senior Living Parker-Hannafin First Citizens BancShares Scotts Miracle-Gro First Republic Bank San Francisco Hershey *It is not clear that the state law prohibits companies from adopting a less stringent standard, and one Ohio- Hospitality Properties Trust incorporated firm in the Russell 1000, DSW, has done so. Ingredion Incorporated International Paper Company incorporated in Switzerland* Nabors Industries TE Connectivity, Ltd. Occidental People’s United Financial *Legal framework on this matter has not yet been Prologis investigated Realogy Holdings Reliance Steel & Aluminum Seadrill Limited Spirit AeroSystems Holdings Taubman Centers Texas Instruments Universal Health Services White Mountains Insurance Group Other than Nabors Industries, the only company in this list that has had a recent shareholder proposal with a vote tally close enough for these methodological issues to be significant is International Paper, which is incorporated in New York. Interestingly, the company released an 8K announcing that shareholders approved a non- binding proposal, although according to the company’s stated calculation methodology it would have failed. 5 Consistency of Shareholder/Management Proposal Methodologies Only two companies in the S&P 500 and Russell 1000 Indices systematically treat shareholder proposals differently from management proposals. AIG, where a majority of shares outstanding are required to approve shareholder proposals, but a majority of shares cast for or against a proposal (which excludes abstentions and broker non-votes) is required to approve management proposals. This means that shareholder proposals at AIG are subjected to a much higher---and in practice, impossible---standard, while management proposals are calculated in the way most likely to facilitate passage. Hospitality Properties Trust, a Maryland real estate investment trust (REIT). Any proposals other than the election of Trustees require the support 75% of “votes entitled to be cast” on the matter (which presumably means shares outstanding), unless the matter has been previously approved by the Board of Trustees. In that case, the vote required for approval is much lower: “a majority of the votes cast” at a shareholder meeting. A third company, Quest Diagnostics, amended its bylaws to provide that Say on Pay vote results will be calculated out of votes cast for and against the proposal (excluding abstentions and broker non- votes), while the company standard for other management and shareholder proposals remains a majority of votes entitled to vote on the matter (which for non-routine items, would include abstentions but exclude broker non-votes). This means that at Quest, vote calculation methods make it somewhat easier for the executive pay plan to receive non-binding